Where there is estimation of business income, disallowance and consequential addition of revenue expenditure is not sustainable, as held by the jurisdictional High Court in the case of Indwell Constructions v. CIT (1998) 232 ITR 776 (AP-HC). In view of the same, we agree with the view of the Commissioner (Appeals) that this issue is also squarely covered by the decision of the jurisdictional High Court in the case of Indwell Constructions (supra), wherein it has been categorically held that where business income of an assessee is estimated, no other disallowance may be made. In the case of MA Highways, Commissionered supra, as well, the Tribunal has taken into consideration the decision of the jurisdictional High Court and held that no separate disallowance of expenditure shall be made once income is determined by resorting to estimation. Respectfully following the same, we do not see any reason to interfere with the orders of the Commissioner (Appeals).

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

ITA No. 202/Hyd/2015 is the appeal filed by M/s. Sree Nagendra Constructions for the assessment year 2011-12, while ITA No. 167/Hyd/2015 is the appeal filed by the Revenue against the relief granted to M/s. Sree Nagendra Constructions for the assessment year 2009-10. All the other appeals are cross appeals filed by the respective assessees as well as the Revenue for the assessment year 2011-12, against the orders of the Commissioner (Appeals), Hyderabad, dated 28-11-2014 respectively.

ITA No. 167/Hyd/2015-A.Y 2009-10

2. This is Revenue’s appeal for the assessment year 2009-10.

3. Brief facts of the case are that there was search & seizure operation under section 132 of the Income Tax Act in the case of M/s. Madhucon Projects Ltd. and its group on 4-2-2011. The assessee, being one of the sub-contractors of Madhucon Group, was also searched. Pursuant there to, a notice under section 153A of the Act was issued to the assessee on 13-1-2012. During the assessment proceedings under section 143(3) read with section 153A of the Act, the assessing officer called for various details from the assessee and the assessee furnished the same. After considering the said material, the assessing officer observed that M/s. Madhucon Projects Ltd. had diverted the funds of the subcontractors, (the assessee being one of them) and has siphoned off the same during the financial year 2008-09 relevant to the assessment year 2009-10. The assessing officer, in Para 3.6 of his order, has tabulated the amounts given and taken from the assessee. Observing that these amounts were never used by the assessee for its business activities and that these amounts were disallowed in the hands of the Principal Contractor i.e., M/s. Madhucon Projects Ltd, he made the addition protectively in the hands of the assessee firm. Thereafter, he also estimated the business profit of the assessee at 8% of the gross receipts and brought it to tax. Aggrieved, the assessee preferred an appeal before the Commissioner (Appeals), who granted relief to the assessee by observing that the issues involved in this case are identical to the issues decided in the case of M/s. MAA Highways for the assessment year 2007-08 to 2010-11 wherein he had passed a detailed order in ITA No. 123/Commissioner (Appeals)-12/H/2013-14. He accordingly, deleted the addition of the amounts withdrawn from the Bank A/c of the assessee and routed to the main contractor i.e., M/s. Madhucon Projects Ltd. However, he confirmed the estimation of business income at 8% of its gross receipts. Against the relief granted by the Commissioner (Appeals), the Revenue is in appeal before us.

4. The learned Departmental Representative supported the order of the assessing officer and further placed reliance upon the judgment of the Hon’ble Gujarat High Court in the case of CIT v. Surendra Gulabchand Modi 140 ITR 517 (Guj.) to submit that since the issue of substantive addition in the case of M/s. Madhucon Projects Ltd. is pending before the Commissioner (Appeals), these appeals of the assessee also should be remanded to the file of the Commissioner (Appeals) with a direction to decide both the appeals simultaneously.

5. The learned Counsel for the assessee, on the other hand, submitted that similar arguments of the learned Departmental Representative in the case of M/s. MAA Highways were considered by the Tribunal and it was held in favour of the assessee.

6. Having regard to the rival contentions and the material on record, we find that in the case of MAA Highways, it has been observed that the assessments in the said case have also been done under section 153A of the Act, pursuant to the search conducted in the group cases of M/s. Madhucon Projects Ltd. on the same date i.e., 4-2-2011. In the said case also, the Revenue had sought remand of the matters to the file of the Commissioner (Appeals) to decide along with the cases of Madhucon Projects Ltd. After considering the arguments of both the parties at length, this Tribunal has held that the assessee being a sub-contractor and since its books of account were not reliable, the income can be estimated at 8% of the gross receipts where the assessee is a main contractor and at 5% if it is a sub-contractor. Further, it has also been observed that where the income has been estimated, then there cannot be any disallowance of expenditure as held by the jurisdictional High Court in the case of M/s. Indwell Constructions Ltd. (232 ITR 776). For the purpose of ready reference, the relevant paragraphs are reproduced hereunder :–

“2. Facts of the case common in all these cases are that there was a search and seizure operation under section 132 of the Act in the case of Madhucon Projects Limited and group of cases on 4-2-2011. After the search in the case Madhucon Projects Ltd. and its group concerns including the assessees herein, notices under section 153A were issued to the assessees. In response thereto, the assessees filed returns of income for relevant assessment years. During the assessment proceedings, under section 143(3), the books of account maintained by the assessees were rejected and the income of the assessees was estimated at 8% of the gross receipts, and the assessing officer accordingly made additions to the income returned by the assessees.

3. Further, the assessing officer also observed that the company’s address given by M/s. Madhucon Projects Ltd. was actually a small room on the terrace and no documents or papers relating to the assessee or M/s. Madhucon Group were available. He further observed that during the course of search and in the post search proceedings, though the assessees were given sufficient time to produce the books of account and other supporting documents, the assessees have failed to produce the same. He further observed that the assessees were mainly stationed at Khammam and have opened bank accounts in Hyderabad and New Delhi, where they do not have any operations, and therefore, he came to the conclusion that these bank accounts are opened only to facilitate the diversion of funds to the principal contractor, Madhucon Projects Ltd. He further observed that these accounts are used for withdrawing funds by the employees of Madhucon Projects Ltd., as it was unearthed during the course of search and that though the payments are realised and cheques were issued in favour of these sub-contractors, the money was eventually withdrawn by the promoters of M/s. Madhucon Projects Ltd. through their employees by way of self-signed cheques, which are handed over by these sub-contractors to the Managers of M/s. Madhucon Projects. Observing that these amounts were withdrawn and siphoned back to the management of M/s. Madhucon Projects Ltd. during the relevant financial year, the assessing officer concluded that these amounts were never used for the business activity of the assessees herein but were returned back to the contractor. He therefore, disallowed the same in the hands of the principal contractor, and added the same protectively in the hands of the assessee firms herein.

4. Against the assessments thus made, assessees preferred appeals before the Commissioner (Appeals), who though, confirmed the estimation of income at 8% of the gross receipts, granted relief by deleting the additions made on protective basis.

5. Learned counsel for the assessees submitted that the assessees were maintaining regular books of account, but the assessing officer rejected the same and estimated the income of the assessees at 8% of the gross receipts. He submitted that this estimation of income in an assessment completed under section 143(3) read with section 153A is not sustainable. Even otherwise, he submitted that the issue of estimation of income in the case of M/s. MA Highways, one of the assessees herein, has come up before this Tribunal in ITA No. 54/Hyd.2013 and this Tribunal vide its order dated 30-7-2013 has directed estimation of income at 5% of the gross receipts in the case of sub6 12 contracts and therefore, since all the assessees herein belong to the same group and factual background in these cases also being same, income of these assessees herein should also be estimated at 5%.

6. As regards the estimation of income, the Learned Departmental Representative submitted that there is no fixed percentage of gross receipts, which can be adopted to estimate the income of the assessees, and that as the books of account of the assessees are not reliable, the assessing officer on a notional basis can estimate the income. According to her, the estimation of income at 8% of the gross receipts is quite reasonable and justified.

7. As regards the Revenue’s appeal against the deletion of additions made on protective basis, the Learned Departmental Representative submitted that since the substantive additions made in the hands of M/s. Madhucon Projects Ltd., are pending adjudication by the Commissioner (Appeals), these appeals may be kept pending, to which the learned counsel for the assessee objected. The Learned Departmental Representative also relied upon the decision of the coordinate Bench of this Tribunal in the case of Prabhu Wines in ITA No. 1100/Hyd.2013 dt. 23-10-2013, wherein after considering the principles laid down in Indwell Constructions (232 ITR 776), it has been held that they are applicable only to the extent of computation of income under the head “Business” and as far as addition of cash credits under section 68 and section 69, the decision of the Hon’ble Supreme Court in the case of CIT v. Devi Prasad Vishwanath Prasad 72 ITR 194 (SC) was followed.

8. On the other hand, the learned counsel for the assessees also relied upon the decision of the jurisdictional High Court in the case of Indwell Constructions (232 ITR 776), wherein it was held that where the income of an assessee is estimated, there cannot be any other addition. Therefore, according to him, the addition of rerouting of funds in the hands of the assessees herein on protective basis is rightly deleted by the Commissioner (Appeals).

9. Having regard to the rival contentions and the material on record, we find that on the issue of estimation of business income, the issue has already been considered and adjudicated by the coordinate bench of this Tribunal in the case of one of the assessees herein, viz., MA Highways, for assessment year 2007-08, wherein estimation of income in the hands of subcontracts at 5% of the gross receipts was held to be reasonable. Respectfully following the same, we hold that in all these cases as well, the business income of the assessees for the years under appeal be estimated at 5% of the gross receipts, and additions if any, may be determined accordingly. Assessees appeals are accordingly treated as allowed.

10. As regards the Revenue’s appeals against the deletion of the additions made on protective basis in the cases of these assessees, we find that the additions have been made consequent to detecting that the assessees received funds from M/s. MPL Ltd. and rerouted the same back to M/s. MPL itself assessing officer therefore, presumed that the assessees have not expended the said receipts towards their business activity. But as rightly held by Commissioner (Appeals), all withdrawals cannot be presumed to be the business expenditure of the assessee, particularly, when, the same is not debited to the Profit & Loss Account. The Commissioner (Appeals), after examining the issue has held at para 6.5.3 as under-

“6.5.3. Knowing that the amount withdrawn from bank account was appropriated by the main contractor and that it was not used by the appellant is one aspect. However, to say that this item needs to be disallowed in the hands of the appellant, we have to first establish that the specific withdrawals were accounted in books as expenditure incurred during the year and further, the expenditure was not only revenue in nature but was also debited to the P&L account to be disallowed as expenditure. In the absence of books and vouchers, one cannot specifically conclude that the amounts withdrawn were indeed deployed and were incurred towards revenue expenditure and got debited to P&L acct. It is also seen that the withdrawals were actually more than the entire turnover of the appellant firm in assessment year 2011-12 indicating that all withdrawals could not have been debited in the appellant’s books as expenditure. Similar feature was found in the case of the other two subcontracting firms namely, M/s. Varalakshmi Constructions, the withdrawls from bank were more than turnover for assessment year 2010-11. For M/s. Ragini Constructions, the withdrawals were more than the turnover for assessment year 2010-11 and assessment year 2011-12.”

The Learned Departmental Representative, had relied upon the decision in the case of Madhu Wines cited (supra), but we find that the decisions relied upon by the Learned Departmental Representative are not applicable to the facts of the cases before us. In the cited case, besides the addition on account of estimation of business income, further additions under section 68 were upheld. In the cases before us, though the authorities below have not mentioned the section under which the disallowance and the consequential additions are made, from the order of the assessing officer, it appears that the receipts of the assessee were disallowed as they are not used for business M/s. MA Highways and three others Khammam activity. Thus, it is disallowance of business expenditure. The Commissioner (Appeals) has rightly pointed out that the amounts withdrawn cannot be presumed to have been deployed and incurred towards revenue expenditure and got debited to the Profit & Loss Account. Where there is estimation of business income, disallowance and consequential addition of revenue expenditure is not sustainable, as held by the jurisdictional High Court in the case of Indwell Constructions (supra). In view of the same, we agree with the view of the Commissioner (Appeals) that this issue is also squarely covered by the decision of the jurisdictional High Court in the case of Indwell Constructions (supra), wherein it has been categorically held that where business income of an assessee is estimated, no other disallowance may be made. In the case of MA Highways, Commissionered supra, as well, the Tribunal has taken into consideration the decision of the jurisdictional High Court and held that no separate disallowance of expenditure shall be made once income is determined by resorting to estimation. Respectfully following the same, we do not see any reason to interfere with the orders of the Commissioner (Appeals).

7. The learned Departmental Representative had placed reliance upon the judgment of the Hon’ble Gujarat High Court in the case of CIT v. Surendra Gulabchand Modi for keeping the matter pending till the appeals of the Madhucon Projects Ltd. are disposed of by the Commissioner (Appeals). We find that the said decision was for the assessment years 1956-57 and 1957-58 and in the said cases, the issue was pending before the Hon’ble Supreme Court and not before the Commissioner (Appeals). The judgment of the Hon’ble Supreme Court will be binding on all the Courts in India including the Tribunal whereas the order of the ITAT will be binding on the Commissioner (Appeals). Therefore, the said decision is not applicable to the facts of the case before us. In the case of MAA Highways (cited supra), we have already held that where the income is estimated after rejection of books of account, no further disallowance of business expenditure can be made. In the case before us also, the assessing officer has made the estimation on the ground that the assessee had not incurred any expenditure and the amounts were never used for its business activities and were returned back to the main contractor. Since the facts and circumstances are the same before us as in the case of Maa Highways and since we have confirmed the estimation of income by the assessing officer at 8% in the case of main contractor and 5% in the case of a sub-contractor, we see no reason to interfere with the order of the Commissioner (Appeals).

8. In the result, Revenue’s appeal is dismissed.

ITA No. 202/Hyd/2015-A.Y 2011-12

9. In this case, the assessee is challenging the order of the Commissioner (Appeals) in confirming the estimation of income at 8% of its gross receipts. According to the assessee, the assessee is a sub-contractor and therefore its income should be estimated at 5% of the gross receipt and not at 8% of the turnover as held by the Coordinate Bench of this Tribunal in the case of Maa Highways in ITA Nos. 200 & 201/Hyd/2015. The learned Counsel for the assessee also submitted that this issue is covered in favour of the assessee by the decision of the Tribunal in ITA No. 169/Hyd/2015 wherein the Revenue’s appeal has been dismissed by directing the assessing officer to verify whether the assessee is a sub-contractor or main contractor and to estimate the income @ 8% for the main contractor and at 5% in the case of sub-contractor.

10. Having regard to the rival contentions and the material on record, we find that in the assessee’s own case, we have already held that the income should be estimated @8% of its gross receipts in the case of main contractor and @5% of its gross receipts in the case of sub-contractor in the Revenue’s appeal for the assessment year 2009-10 and also in the Revenue’s appeal in the assessee’s own case for the assessment year 2011-12, in ITA No. 169/Hyd/2015 dated 31-3-2016. Accordingly, the assessing officer is directed to verify the facts and re-compute the income accordingly subject to the condition that the assessed income shall not be less than the returned income of the assessee.

11. In the result, assessee’s appeal is treated as allowed for statistical purposes.

ITA Nos. 139 & 196/Hyd/2015 assessment year 2011-12 (MAA Highways)

12. ITA No. 139/Hyd/2015 is Revenue’s appeal and ITA No. 196/Hyd/2015 is assessee’s appeal for the assessment year 2011-12. The issues involved in these appeals for the relevant A.Y, are similar to the issues in the case of Sree Nagendra Constructions in ITA No. 167/Hyd/2015– assessment year 2009-10 and in ITA No. 202/Hyd/2015 for assessment year 2011-12 as above and for the reasons given in the above paragraphs and subject to the condition that the assessed income shall not be less than the returned income of the assessee, the Revenue’s appeal is dismissed and the assessee’s appeal is treated as allowed for statistical purposes.

13. Both are cross appeals and the issues involved in these appeals for the relevant assessment year are similar to the issues in the case of Sree Nagendra Constructions in ITA No. 167/Hyd/2015-A.Y 2009-10 and ITA No. 202/Hyd/2015 for assessment year 2011-12 as above and for the reasons given in the above paragraphs and subject to the condition that the assessed income shall not be less than the returned income of the assessee, the Revenue’s appeal is dismissed and the assessee’s appeal is treated as allowed for statistical purposes.

14. Both are cross appeals and the issues involved in these appeals for the relevant assessment year are similar to the issues in the case of Sree Nagendra Constructions in ITA No. 167/Hyd/2015-A.Y 2009-10 and ITA No. 202/Hyd/2015 for assessment year 2011-12 as above and for the reasons given in the above paragraphs and subject to the condition that the assessed income shall not be less than the returned income of the assessee, the Revenue’s appeal is dismissed and the assessee’s appeal is treated as allowed for statistical purposes.

15. To sum up, the appeals filed by the Revenue are dismissed, while the appeals of the respective assessees are treated as allowed for statistical purposes.